Study Reveals Significant Debt Threshold for Economic Growth in Sub-Saharan Africa

Published in the journal Heliyon by researchers Jerry Ogutu Sumba, Kennedy Nyabuto Ocharo, and Paul Joshua Mugambi, the study shifts the focus from simply assessing whether debt is beneficial to identifying the exact point at which it begins to hinder growth. The researchers considered factors such as a country's income level and the strength of its institutions, addressing longstanding debates among economists regarding the relationship between debt and growth.

Historically, sub-Saharan Africa's external debt rose sharply in the 1980s, peaking at 58 percent of GDP in 1994. Following initiatives to relieve debt burdens, the region saw a decline, with external debt falling to 21.85 percent in 2008. However, by 2022, the median public debt-to-GDP ratio had surged to 59.1 percent, amid increased borrowing for infrastructure and military spending. In 2020, regional external debt reached 47.16 percent, coinciding with a GDP growth decline of minus 2.01 percent, exacerbated by the COVID-19 pandemic.

To determine the tipping point for debt, the authors employed a Dynamic Panel Threshold Model from data spanning 2005 to 2022, focusing on the post-debt relief period to capture a more consistent phase. Their findings indicated a regime-switching relationship, with external debt having a small positive impact below 47.23 percent of GDP, and a significantly negative one above that threshold. For low-income countries, the threshold was even lower at 42.64 percent, while for middle-income nations, it was slightly higher at 49.81 percent, though the difference was not statistically significant.

The study further suggested that institutional quality plays a vital role in how debt affects growth. It measured institutional effectiveness using six Worldwide Governance Indicators. The research found that below an index level of 0.77, debt negatively impacts growth; above this level, it can foster growth. When considering institutional quality alongside external debt levels, the effective threshold for debt increased to 53.17 percent for the full sample, particularly benefiting middle-income countries.

The implications of these findings are substantial. The authors advocate for sub-Saharan African governments to keep external debt below the 47 percent threshold and to prioritize institutional strengthening as part of their debt management strategies. They counsel multilateral lenders, such as the IMF and World Bank, to link financing terms to governance metrics rather than just income levels. The study also acknowledges certain limitations, such as the identification of statistical turning points rather than direct causal relationships, suggesting future research could enhance understanding by exploring heterogeneous threshold models.